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CMU 2.0: what next for capital markets union?

Capital markets union, the EU’s flagship initiative to boost capital markets in Europe and reduce the economy’s reliance on bank lending is three years old. This report analyses the progress so far, the impact of Brexit, and the shift in direction in CMU 2.0, (the revised version of the project that was published last month) – and suggests some more radical longer-term measures to build bigger and better capital markets in Europe.

Depending on your point of view, CMU is either an ambitious project to map the challenges facing capital markets in the EU and lay the foundations for further growth in the decades ahead, or a missed opportunity for reform that avoids the difficult questions and that will do little more than tinker at the edges of the problem. Either way, it’s hard to avoid the fact that the past two years have seen a blizzard of reviews, consultations and proposals to reform capital markets in Europe.

It may seem ‘wonkish’ but the opportunity for the European economy and for the financial services industry is huge: if capital markets were as deep in the EU27 relative to GDP as they are across the EU28 today (including the UK), it would mean more than €2 trillion in additional pensions and insurance assets, a €1 trillion boost to stockmarkets, and more than €50bn a year in additional capital markets funding for companies, according to our research.

In practical terms CMU 2.0 aims to:

*unlock more financing for growth companies

*accelerate supervisory and regulatory convergence in the EU remove national barriers to cross-border investment (and in particular the distribution of funds)

*boost the role of fintech in capital markets

*encourage a more sustainable approach to finance

*develop a more proportionate supervisory regime for asset managers

But in order to achieve this, everyone needs to be realistic about the challenges ahead, how long it will take, and about the need for countries to embrace capital markets union as part of a wider programme of much-needed economic reform.

Here are the main highlight of the report (for a copy of the report, please email info@newfinancial.eu):

1. A growth opportunity – capital markets union represents a huge opportunity to build bigger and better markets in the EU. We estimate that it could unlock around €2 trillion in long-term capital and inject more than €50bn a year in additional funding for companies in the EU27 alone, as well as reducing costs and diversifying risks for issuers, investors and market participants.

2. On track? – while CMU has been criticised in some quarters as unambitious and a missed opportunity, we believe that given the many political challenges and unrealistic expectations that it faced it is on track to lay some vital building blocks for the future growth of capital markets in Europe.

3. Brexit means Brexit – Brexit has thrown a huge spanner in the works of CMU. The departure of the EU’s biggest and deepest capital markets will disrupt the project and cause dislocation and fragmentation in markets. Negotiating the future settlement with the UK will consume valuable and limited political capital. On the positive side, Brexit injects a new sense of urgency into CMU and will enable the EU to adopt a greater sense of ‘ownership’ of the project.

4. The politics of CMU – one of the main obstacles so far to progress has been political wrangling between EU institutions and resistance from individual member states seeking to protect their national markets. For CMU to succeed, the EU needs to bang heads together and encourage EU institutions and member states to adopt a broader programme of much-needed economic reforms.

5. A new sense of urgency – Brexit has injected a new sense of urgency to CMU by exposing the relatively low-level of development of capital markets in the EU27 (on average, markets are only have as deep in the EU27 relative to GDP as in the UK). This should help focus the minds of national governments as to how capital markets can help boost investment and growth.

6. A shift in priorities (1) – CMU 2.0, the revised project plan published last month, includes a number of areas where the Commission has accelerated its proposals, including supervisory convergence, mobilising private capital for long-term investment, addressing the barriers to the cross-border distribution of funds, and helping build capital markets ecosystem in less developed markets.

7. A shift in priorities (2) – CMU 2.0 also includes several new initiatives, such as helping to shift non-performing loans off bank balance sheets, a much bigger focus on sustainable finance, and developing a new EU-wide regime for fintech companies.

8. A shift in priorities (3) – The Commission has also listened to market concerned in several key areas: it is proposing a more fundamental rethink of the regulatory framework for smaller companies and the market participants that serve them, and it will review the prudential framework for asset managers.

9. Towards CMU 3.0– while CMU 2.0 should help lay the groundwork for bigger and better capital markets over the next few years, we believe the EU should take a bolder approach from 2020 and take more radical action to accelerate the development of a single capital market in Europe.

10. A more radical approach? – the EU could take a more radical approach in five key areas: accelerating supervisory convergence, building pools of long-term capital, focusing more on transparency and competition, focusing more on growth companies rather than SMEs, and fixing Europe’s fragmented and outdated market infrastructure.

New Financial is a think tank and forum that believes Europe needs bigger and better capital markets to help drive its recovery and growth. We think this presents a huge opportunity for the industry and its customers to embrace change and rethink how capital markets work.

We are a social enterprise that launched in September 2014. We are funded by institutional membership and limit some of our research to our network of member firms, policymakers, government officials and regulators. For a full copy of this (free) report please email info@newfinancial.eu